Advanced Valuation and Deal Structuring (3 days)

Day 1 a.m. - M&A Accounting Issues

This session reviews the fundamentals of M&A accounting. In addition, complex areas such as the valuation of noncontrolling interest, goodwill calculation and the treatment of fees are covered.

Key topics:

• Purchase accounting
• Recap of equity method and consolidation of subsidiaries
• Noncontrolling/minority interest
• Contingent consideration
• Equity issuance fees
• Financing fees
• Legal, accounting, tax and M&A advisory fees
• Fair value of net assets acquired
• Impairment testing
• Negative goodwill

Day 1 p.m. - M&A Modeling Issues

This session addresses four key complexities in M&A models: Non-coterminus year-ends, using a flexible deal date, currency translation and the creation of a noncontrolling interest.

We start by addressing the issue of calendarizing the financials of buyer and target when they have non-coterminous year ends. Using a simplified merger model, we demonstrate the issue and then we build a flexible calendarization structure. The issue of working with a flexible deal date is examined next. The balance sheets of acquirer and target are calendarized at deal date and the consolidation issues at deal date are addressed, thus creating the opening balance. We then proceed to build the consolidated financial statements post-deal. The next issue is the foreign exchange translation required when the acquirer and target financials are reported in different currencies. This is incorporated in the model using the latest known spot rate. Finally, we cover the creation of a noncontrolling interest (minority interest) when the buyer acquires control but purchases less than 100% of target's equity. This issue is analyzed using a separate mini-model.

In the last part of the session, participants are given an expanded merger model to complete, which includes all the complexities discussed during the session.

In order to get the full benefit of the session, participants need a pre-existing knowledge of the fundamentals of M&A accounting and some familiarity with financial modeling.

Key topics:

• Building a M&A model: overview
• Non-coterminous years: calendarizing the financials of the target
• Dealing with calendarization issues (e.g. lack of underlying data)
• Building a flexible deal date in the M&A model
• Explanation of stub and roll-forward periods in relation to flexible deal date
• Purchase accounting and the mechanics of full consolidation
• Modeling the completion balance sheet and consolidated financial statements post-deal
• Dealing with different currencies
• Creating a noncontrolling interest at acquisition date

Day 2 a.m. - World of Returns

This program focuses on the analysis of returns. First, the importance of returns in relation to value creation is illustrated. The concept of invested capital is then introduced and practical examples are used to show how to calculate the return on invested capital, and what its advantages and disadvantages are. We then show how to incorporate explicit returns assumptions in a DCF model, by using the value driver formula to calculate the terminal value. The relevance of returns in an M&A context is also discussed.

Key topics:

• Returns analysis
• Value creation: what it is and what its drivers are (ROE and ROIC)
• The concept of invested capital
• Return on invested capital (ROIC)
• Relationship between ROIC and WACC
• Relationship between ROIC and ROE
• Relationship between ROIC and growth
• Using ROIC in DCF valuation
• Value driver terminal value approach
• Concept of fading returns
• Impact of returns on M&A analysis

Day 2 p.m. - DCF Issues

This session focuses on the different approaches of terminal value calculations. Participants will model a 2 stage steady state terminal value and understand how returns fade to WACC over time.

Key topics:

• Re-cap of free cash flows, and how to discount and make the mid-year adjustment when the deal date is not at year end
• Understanding how to correctly model the steady state cash flow
• Traditional terminal value approaches and pitfalls in long term return and reinvestment rates
• Understanding the value gap concept
• Disaggregating return on invested capital - profitability and efficiency
• Alternative terminal value approach: value driver
• Building a two-stage steady state terminal value model
• Sensitizing the WACC for different capital structures
• Building a graph of the optimal capital structure analysis

Day 3 a.m. - Divestiture Analysis and Modeling

Understand the main divestiture and restructuring options available to a firm as a going concern. The financial modeling also incorporates possible adjustments to the capital structure of the business being sold / restructured.

Key topics:

• Overview of divestiture and restructuring alternatives available to firms
• Financial modeling: balance sheet impact and EPS calculation
• Divestiture
• Spin off or split-up
• Split off
• Equity carve-out
• Adjusting the capital structure of the business to be divested / restructured

Day 3 p.m. - Taxes

This program covers the principles and reporting of taxes. Participants will review tax issues in detail and cover the impact of deferred tax assets and liabilities on their analysis. Tax losses and carry forwards are also covered as well as the deferred tax implications of M&A transactions.

Key topics:

• Marginal tax rates and effective tax rates
• Normalizing (“cleaning”) the ETR
• Finding the MTR in the annual report
• When to use which tax rate
• Temporary vs. permanent timing differences
• What causes deferred tax liabilities
• What causes deferred tax assets
• How the accounting for deferred taxes works
• What are tax losses?
• How they are recovered - carry forward and carry back
• How losses are reported in the published financial statements
• Deferred tax implications of M&A transactions